what is balance sheet

8/7/2019 What is Balance Sheet

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What is Balance Sheet/Statement of Financial PositionJanuary 9th, 2011 | Adam | Posted in Accounting | 459 views | No Comment

Balance sheet is the statement of financial position of a company. It depicts the financial position (sound or weak) of

a company on a specific date. The basic concept involved in balance sheet is that the assets are equal to outside

liabilities and owners equity. The resources or asset of an organization are always generated through financing. This

financing is provided by two sources which internal or external. Internal sources are owners or shareholders whoprovide capital through investment and reinvesting the profits earned over the periods. External sources on the other

hand provide financing through extended credit usually called creditors and granting loans to the firm. It makes sense

that the whole financing must be utilized some where in generating resources or assets for the firm, therefore, the

value of the firms resources must equate the value of whole financing whether internal or external.

The balance sheet forms an integral part of financial statements and extensively used by many stakeholders to judge

the financial strength of the company. It demonstrates that how the financial resources are being utilized to generate

resources for the firm and what type of resources the firm actually generated over the period. It further guides in

inventing whether the financing has generally been employed in high return assets or it may have been wasted in

assets with lower potential.

The items in the balance sheet are segregated into the following:

Assets-Resource Section

Assets are resources in which the funds are invested. The main categories of assets are:Fixed assetsThe assets with useful life of more than one year and are depreciated over their useful life. Fixed assets are

represented on historical costs with accumulated depreciation on the fixed assets on the other side of the balance

sheet. Annual depreciation is charged to the income statement as expense against revenue generation for that

period. Some times revaluation gains and impairment losses on the fixed assets are also entertained in the books

of accounts. The examples of fixed assets include land and buildings, equipment, plant and machinery, and furniture

and fixture etc.

Current AssetsThe assets with useful life lesser than one year are called current assets. Such assets form part of working capital

and result in lower return as compare to fixed assets. Some investment in the current assets is compulsory for a firm

such as accounts receivables, inventories, short term securities, and cash and bankbalances. However, companies

can adopt aggressive or conservative policies with respect to investment in current assets. In aggressive policies little

investment is made to strengthen the profitability and with conservative policies usually handsome investment is

made in current assets to strengthen the liquidity position of the company.

Intangible AssetsIntangible assets are unseen assets such as reputation of the company named as goodwill. Goodwill is calculated

through recommended valuation methods.

Long Term InvestmentsThere may be some long term investments made by a company. Such investments are shown separately in the

assets section of the balance sheet.

Liabilities-Financing Section

Shareholders Funds Owners EquityThis is called equity section of the balance sheet where capital funds invested by the owners or shareholders are

presented. Along with capital funds the reinvestment of the profits over the periods is also cumulated and shown inthis section as addition to the equity. The movement in shareholders funds over the years is also required to disclose

as per international financial reporting standards.

Long Term LiabilitiesExternal funds provided by banks or other financial institutions as debt for a longer time horizon usually more than

one year. Some times companies issue bonds or debentures to arrange finance from the general public. Such bonds

or debentures are also presented in this section of the balance sheet.

Current Liabilities
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Claims on the current assets of the company are called current liabilities. Such liabilities have to be settled within

a financial year. Main part of current liabilities is creditors extending credit of raw materials to the firm. In addition

there may be some accrued expenses such as outstanding salaries or rents etc are also treated as short term claim

on business and are presented in current liabilities.

Example of Balance Sheet

Hypothetical CompanyBalance SheetAs at Jun 30 20XX

Liabilities and Owners Equity Amount $ Asset Amount $Shareholders Equity: Fixed Assets: XXXXEquity Capital XXXX Land and Building XXXXReserves XXXX Machinery and Equipment XXXX

Furniture and Fixture XXXXLong-term Liabilities:

Bonds XXXX Current Assets: Bank Loan XXXX Accounts Receivable XXXXInventories XXXX

Current Liabilities: Prepaid Expenses XXXXAccounts Payable XXXX Cash and Bank Balances XXXX

Accrued Expenses XXXXInvestment in short termsecurities XXXX

Short term loan XXXXOther Assets: Goodwill XXXXInvestment in long term securitiesXXXX

XXXX XXXXThe total of the two sides of balance sheet must equal.

Benefits of Balance SheetThe benefits associated with the balance sheet are as follows:.

Through balance shareholders can judge that how their capital is being used by the management. In what type of

assets their funds are invested to maximize the return. Shareholders through balance sheet review the financial

position of the company and can decide to for further investments or divestments.

Lenders and creditors can judge the liquidity position of the company and make decisions regarding extension of

credits and debts.

Management can decisively evaluate the financial position and take remedial measures if required. Balance sheet

helps management in determining the future financial needs.

Employees can compare the remunerations with financial position and are in a better position to bargain with

management for enhancement in remunerations.Limitations of Balance SheetBalance sheet may not depict actual financial strength or weakness of a company because the figures related to the

fixed assets are reported in the balance sheet at historical costs. The real value of those assets may be more or less

according to their current conditions. Moreover, there may be some liabilities created through off-balance sheet

financing such as operating leases et


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What is Income Statement?January 30th, 2011 | Adam | Posted inAccounting| 674 views | No Comment

Simply a statement showing income, expenses, and profit or loss of firm is called income statement. In technical

terms it is afinancial statementpresenting income earned during a period and expenses incurred to generate that

income along with profit or excess of income over expenses called surplus. Income statement is also referred to as

profit and loss account or a statement of financial performance. An income statement demonstrates how income is

transformed into net income through accounting for the expenses for the same period and indicates operating

performance of the company during that period. Along with expenses income statement also provides for some

portion of the income as doubtful expenses or expenses than can not be determined exactly but have to pay in future.

Non cash expenses such as depreciation and amortization also form part of the expense pool. Unlikebalance sheet itcontains a time period usually six months or twelve months related to which time horizon revenues and expenses are

accounted for.

Income statement is required to be prepared and disclosed under the international financial reportingstandards by

listed companies and large organizations. It is labeled as income and expenditure account or receipt and payment

account in not for profit organizations. Through this statement such organizations need to show the receipts of

donations, subscriptions, and other income during a period along with representing the related administrative or

operating expenses resulting in surplus or deficit.

Income statements can be too short or detailed. Short income statementjust show revenues, cost of goods sold,

Gross Profit, Operating expense, Financing Cost, and Profitability (Loss). However detailed income statements

usually divide the incomes and expenditures into single items and their associated amounts. Operating expenses are

enlisted accordingly and profits before and after taxes are determined. Profits after taxes are actually the net income

for the period and are available to distribute among shareholders or to retain in the business.

The contents of income statement can be divided into following categories:Operating SegmentThe revenues or expenses related to normal or major business operations of the firm are called operating revenues

or expenses. Incomes related to operating activities are inflows resulting from sale of goods, rendering services, or

such activities constituting the main operations of the firm. Similarly operating expenses consists of costs or outflows

incurred to generate revenues from the major operations of the firm. Such costs are further divided into costs incurred

up to making the goods saleable referred to as cost of goods sold and costs incurred to sale the goods and assist in

producing and selling.
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Cost of goods sold is the cost incurred directly in producing the goods such as raw material, direct labor, and

overheads. Other operating costs include administrative, selling, and marketing expenses. Such costs actually assist

in production and sale of goods and services and are also referred to as supporting costs. An important ingredient of

the other operating costs and overheads is depreciation on fixed assets. Depreciation means the portion of the total

cost of asset used in revenue creation of the current period. This is basically an approximation and called non cash

expense.

Non Operating SegmentThere may be incomes earned by a firm from the sources other than of normal business operations. Such revenues

are called non operating revenues because they are unusual in nature. Examples of such revenues are interest

income on deposits, rental income from some property, and gains on sale of assets orsecurities.

Similarly there may be some expenses other than of normal operating expenditures such as losses on sale of assets

and securities. Such expenses also form part of income statement are referred to non operating expenses.

Financial CostCompanies usually get debts fromfinancial institutions to finance the ventures. Such loans require part of income to

be paid as interest for the period which is called finance cost. This financing cost is presented in theincome

statement as deduction from income and part of overall expenditures.

Income TaxAfter dealing with operating, non-operating, and financing items some percentage of profit is to be paid as tax under

the prevailingincome tax regulations. Income tax expense for the period is shown as deduction from the profit before

tax in the income statement.Example of income statement:

Hypothetical Company

Income Statement

For the period ended June 30, 20XX

Sale of goods XXXXOther income XXXXTotal Revenue XXXXLess: Cost of Goods Sold XXXXGross Profit XXXX

Less: Other Operating Expenses:Salaries & Wages XXXXRepair & Maintenance XXXXConveyance charges XXXXUtility expenses XXXXDepreciation XXXXMisc. expenses XXXXTotal operating expenses XXXXEarning before interest and taxes XXXXLess: Financing Costs XXXXEarning before tax XXXXIncome Tax XXXX

Earning after tax XXXX

Benefits of Income StatementFollowing are the main benefits associated with the income statement which the stakeholders can avail.

Through income statement shareholders can know the profitability they earned on the capital invested. Income

statements enable the shareholders to judge the efficiency of the management for converting their capital into

profitability. They can make the managers accountable.

Lenders and creditors can judge the past performance of the company and make decisions regarding extension of

credits and debts.
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Management can critically evaluate the performance and take corrective measures. Income statement helps

management in determining the dividends to be distributed and investments from internal sources.

Employees can compare the remunerations with profitability and can talk to the management for their benefits.

Government agencies such as tax regulators can be able to determine the tax and other liabilities of the companies.

Limitations of Income StatementThough quite comprehensive but income statement also depends upon some approximations or judgmentssuch as

depreciation etc and further it also may vary according to the accounting policies adopted by thecompany. Accounting policies may be regarding inventory valuation methods and depreciation methods et

Statement of Cash FlowJune 24th, 2010 | Adam | Posted in Accounting | 1,297 views | No Comment

Conventional financial statementsi.e. income statement and balance sheet do not give true picture of thecash flows of

the firm. Because income statement incorporates many non-cash expenditures and revenues for the sake of

ascertaining profitability. Similarly balance sheet tells us the overall financial position with respect to firms assets and

liabilities and includes monetary and non-monetary items. In reality the business is a matter of earning cash thereforefirms receive and spend cash on daily basis. The shareholdermust be in loop regarding the cash receipts and

disbursements of the firm.Cash flow statement summarizes the firmscash flows over a given period of time under a

universally accepted and understood format.

The preparation of cash flow statement is a matter of ascertaining cash inflows and outflows with in a given period

mainly one year. It summarizes the cash inflows and outflows. Cash inflows means the sources of cash or cash

receipts and cash outflow means the uses of cash or cash payments. For example, if a

firms accountspayableincreased by $1000 during a period, the change would be an inflow of cash. Few points need

to be understood for the good insight of cash flow statement.

The cash invested in assets is treated as funds tied up in those assets therefore any decrease in assets is referred

to as cash inflow. On the contrary enhancement in assets or cash balances indicates cash outflows because

additional cash has been strapped in assets and cash balances. Likewise decrease in cash balance reflects cash

inflow.

Just like amortization and depletion, depreciation is also a non-cash charge that is deducted from revenue toascertain the profitability for a period. Depreciation is required to be added to the profit after tax to assess the cash

flows from operations in cash flow statement.

To prevent from double counting of depreciation in cash flow statement it is imperative to include gross rather than

net changes in fixed assets while preparing cash flow statement.

Direct changes in retained earnings are not incorporated in cash flow statement.

The statement of cash flows is categorized in three parts namely:

Cash Flow From Operating ActivitiesCash flows resulting from those activities relating to purchase and sale of the firms products and services. In other

words cash flows from operating activities primarily accrue from the major revenue producing activities of the firm.

Cash Flows From Investing ActivitiesInvesting activities relate to the acquisition and disposal of long-term assets. The cash flow from such activities is

necessary to disclose because they show the cash invested in assets intended to generate future revenues for the

firm.Cash Flows From Financing ActivitiesFinancing cash flows are cash flows that result from debt orequityfinancingtransactions and include incurrence and

repayment of debt cash inflows from the sale of shares and cash outflows to repurchase shares or pay cash

dividends. The cash flows from financing activities is necessary to disclose because they represent future claims on

the firm from the providers of the funds.

The formation of cash flow statement can be more broadly understood by the following example.

Example
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Solution

Cash Flow Statement$ Inthousand $ In thousand

July 1, 2008 to June 30, 2009

Cash flow from operating activities:Net earnings 200,000Adjustments:Add Depreciation 111,000

311,000Changes in assets and liabilities:

Add Accounts receivables 62,000Add Accounts payables 12,000Add Accruals 27,000 101,000

Less Inventories 94,000Less Prepaid expenses 3,500Less Deferred income taxes 6,000Less Income Tax payable 89,900 (193,400)

218,600

Cash flows from investing activities:

Add Other assets 500Less fixed assets 104,000Less long term investments 65,000 (169,000)

(168,500)

Cash flows from financing activities:Add Bank Loan 91,000Add Long term debt 4,300
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Add Common stock 100 95,400Less Dividends (143,000)

(47,600)

Increase in cash and short term investments (Net cash flows) 2,500Cash at the beginning of the period 175,000Cash at the end of the period 177,500Importance of Cash Flow StatementThe statement of cash flows allows the financial manager and other stakeholders to analyze the firms cash flows.

The manager should pay special attention both to the major categories of cash flow and to the individual items of

cash flow and outflow to assess whether any developments have occurred that are contrary to the companys

financial policies. In addition the statement can be used to analyze the progress towards the financial goals and

deficiencies. From the investors point of view cash flow statement provide information about the liquidity position of

the firm. They can analyze the future cash streams of the firm and future expected dividends

Inflation Types and Causes

October 16th, 2010 | Adam | Posted inEconomics | 1,240 views | No CommentInflation is an economic condition in which general price level rise, and currency is devalued over a period of

time. The value of currencydecreases and resulted in erosion ofpurchasing power. One unit of currency can purchase

fewer goods and services. Currentlyinflation rate in developed countries is below 5% and in developing countries

upto25%. In some countries there is hyper inflation, and rate is above 100%. Inflation rate between 5% to 7% is

considered a healthy and good for growth of economy.

Types of InflationBelow are the four major types of inflation caused by different economic forces.

MonetaryInflation: Monetary inflation is directly related to control of money. It is a direct result of supply of currency,

excessive money creation cause monetary inflation. The printing of more currency by the government increases the

inflation rate.

Wage Inflation/Demand-pull InflationWhen demand of product and services exceeds the supply of the product in the economy it is known as wage or

demand-pull inflation. This scarcity of good and services pushes the general price level upward. This trend follow thecommon law of demand as demand increases so the prices level and situation prevail until supply adjust accordingly.

In the time of emergencies like during or after wartime the affect is more Sevier.

Cost-push InflationWhen the cost of production increase it has a direct affect of price incremental shift to end user, this increase

inprice level is called cost-push inflation. For example if the there is a rise in labor wages it will increase the unit cost

and price of that product will increase. Once this price upward movement trend set forth it affects whole economy

andinflation level rise. Cost-push inflation may or may not be occur with Wage inflation.

Oligopolistic inflation/Pricing Power InflationCommonly known as administeredprice inflation, this type of inflation occurs when the industries and professionals

decide to increase prices for increasing their profit margins. Oligopolistic appeared when some oligopoly oriented

industries have control over demand and supply and they manipulate this to set the price level for increase their

profits. A significant point for oligopolistic inflation is it doesnt exist in financial crises and economic depression.

Sectoral InflationAnother major type of inflation is sectoral inflation, it is an Increase in theprice of such commodity which have its

affect on other sectors of economy for instance if price of the crud oil goes up it will directly affect other sectors; its

impact on aviation industry can be seen where the fares go up. In recession time it effect adversely and could cause

layoffs. When increase of prices in one sector of economy has its effect on other sectors it is known as sectoral

Inflation.

Other Types of InflationHyperinflation/Runaway Inflation
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Hyper inflation is the type of inflation in which inflation level wet abnormally high. The economies in disaster like war

mostly face hyper inflation. This is the time when there is shortage of supplies of all necessities of life andprices go

extraordinarily high. Hyper or runaway inflation doesnt sustain for a long time. In recent years hyper inflation can be

seen in Zimbabwe.

Fiscal Inflation

Fiscal inflation is a result of excessive government expenditures. When there is fiscal inflation there will be deficit

budget.Causes of InflationAverage Earnings

Increase in average earning results in increase in demand of product and services, which leads to increase

inprice level

Reasons of InflationSeptember 4th, 2010 | Adam | Posted inEconomics| 752 views | No Comment

Inflation is a condition where the general price level is rising continuously indicating the imbalance between supply

and demand of goods at current prices. The causes of inflation vary from one country to another, what different types

of inflation existing in different places depending on the reasons that generateinflation. However, there are some

common causes of inflation between the different countries listed below.Funding GapThe situation in which government spendingexceeds its revenue is called deficit financing. Additional expenses in the

budget deficit is met through deficit financing. Due to funding shortfalls in the money supply in the country increases,

but the production does not increase at the same rate so the price starts to rise and triggering inflation.

Increasing the money supplyHuge increase inmoney supply is also a main reason of inflation. The money supply increases due to several

reasons, such as bank rates low, financing the deficit, declining reserve ratio, etc. Because of the money supply

increased the amount of cash with the people and banks increases. Thus commercial banks offer more loans

to people of lower interest rates and on the other hand, the people will demand more goods and services due to the

availability of cash. Due to increased demand for goods and services, prices start to rise and thus causeinflation.

Increased Development Costs and DevelopmentDevelopment expenditure and development of government also lead to inflation. For example, no development costs

such as defense spending, official foreign visits of government, increased the salaries of publicemployees, and sodrives theeconomy an inflationary situation. Moreover in most of the production of development projects started

many years after the money has been spent. This type of development projects is also a source of inflation.

Population ExplosionRapid population growth is also a major cause of inflation. With the increasing public demand for goods and services

also increases but supply does not increase at the same pace. Due to the imbalance between supply and demand of

goods and services, prices start to rise and triggering inflation.

The Currency DevaluationThe devaluation of the currency relates to the reduction of the external value of the currency of the monetary

authorities through an official order. When the local currency depreciates against foreign currency, then theprices of

imported goods will increase. These imported products are used in various factors of production and ultimately

increase the cost of production. Due to increased production costs begin to increase prices and cause inflation. This

type of inflation is called cost inflation push.

Political InstabilityPolitical stability is very important for the economicdevelopment of a country. Political stability discourage speculation

and hoarding and encourages investment. If there is an unexpected twist in the political situation of a country become

entrepreneurs reluctant to invest. Just as foreign investors do not invest, while industrialists and businessmen feel

uncertain and can not make good plans. Due to the scarcity of goods and services are produced and cause inflation.

Undesirable ActivitiesVarious illegal activities such as smuggling, black market, hoarding etc impedingeconomic growth and the causes of

shortage of supply for domestic use. In cases of hoarding often artificial scarcity of essential items is created and

charged huge profits. Here it should be noted that income from these sources not used in productive activities and
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not inadvertently spent on luxury items, jewelry, speculation, consumer goods, etc. Because of the increased

spending, the demand for goods and services increases and thus causes inflation.

Inflation and Types of InflationSeptember 3rd, 2010 | Adam | Posted in Economics| 1,148 views | No Comment

The most simple and easy definition ofinflation is reduction or drop in the value of money. Inflation is a

comprehensive topics and it also have different types.

Several economists have described inflation in different ways. For example Coulborn define inflation as Too

much money chasing too few goods. According to Crowther Inflation is a state of economy in which the value

of moneydecreases, i.e, prices are rising. In simple words we can say that inflation is the steady increase in overall

prices over long period of time. This increase in the price usually indicates an imbalance between demand and

supply of goods at current prices.

What are the rates of inflationCost Push InflationCost push inflation is an inflation rate that occurred due to increased costs of products and services. The basic

phenomenon is that manufacturing companies buy goods and services at higher prices because they get fewerbenefits. So to win the necessary amount of the profits of these companies pass their higher costs to consumers and

therefore inflation arises. In general, costs of production increases due to factors such asincreased demand for

wages, increase the tax burden from the government, high raw material prices, etc.

Demand Pull InflationAnother type of inflation is a demand pull inflation that occurred due to increased aggregate demand for goods and

services. Due to increased aggregate demand, the profit margins of producers also increase so they try to produce

more, using all resources. But resources are scarce so the imbalance between supply and demand arises. This

means that people demand more than the available supply so prices soar.

Mild InflationMild inflation indicates a slow (say 3% to 4%) in the general price level over a long period of time. This inflation

rate shows a positive growth in the economy and therefore must be maintained to the countrys progress. When

prices gradually increase the earnings of entrepreneurs and industrialists are also raised and try to produce more. As

a result, employ more workers to increase production. This increases the demand for labor which translatesinto increased employment.

Suppressed InflationSuppressed inflation is the inflation rate that the temporary measures taken to prevent inflation but eventually leads to

inflation. In such cases the provision of basic necessities such as agricultural products is set by the government by

introducing price controls on commodities. Its called repressed inflation because prices are suppressed through price

controls. In the repressed inflation, price control is below the equilibrium price, but over time the inflationary pressures

exerted all his force and thus keep track of prices at the balance.

Hidden inflationHidden inflation is that in some cases, the government imposes strict controls to curbprice inflation. In such

situations, employers are forced to sell the products at the prices required. Now because employers can not sell the

commodity at higher prices to get the profit, therefore, lower on the quality of products. This means that employers

are selling lower quality products at higher prices and inflation that is hidden.

StagflationThe situation in which unemployment andinflation rates are high is known as stagflation. It is the combination of two

words i.e the stagnant economy and inflation in the economy. Basically stagflation of the economy refers to a

situation in whichinvestment in the country is growing, but real income is constant or grows more slowly. Such a

situation is caused by population growth. With increasing population, demand for goods and services increases along

with themoney supply leading to inflation
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Measures to Control InflationSeptember 3rd, 2010 | Adam | Posted in Economics| 3,317 views | One Comment

There are several steps to effectively control inflation before it gets out of hand. Given that inflation shows the

imbalance between supply and demand of goods at current prices so that measures be taken to reduce demand or

increase supply of goods and services. The following are some important steps you should take into demand and

supply.The supply side

Increased ProductionThe supply of goods and services can be increased by increasing agricultural and industrial production. Agricultural

production can be increased by providing an adequate supply of agricultural inputs at low prices, the modernization of

agriculture and scientific farm management, adequate water supply for irrigation, industrial production etc similarly

can be increased by increased foreign directinvestment, industrial credit growth, fiscal concessions, etc.

Control of illegal ActivitiesThere are some illegal activities that cause significant inflation in a country. It is hoarding, smuggling, profiteering,

black markets, etc. In the case of smuggling of large quantities of staples like sugar, butter, wheat, rice, etc are

exported abroad illegally in order to obtain higher prices. Similarly, the shortage in most cases artificial staples to

create higher profits. All activities of this evil must be controlled through advertising, as well as punishment.

Peace and SecurityProduction and distribution of goods and services can be effected due to the existence of unease and insecurity in

society. In such circumstances, investors hesitant to invest for fear of potential loss. Similarly, the production of

industrial products is affected due to several unpleasant events such as strikes public etcpor therefore peace and

security must be ensured to maintain the supply of goods and avoid the danger of famine.

Main Energy SourcesThe supply of agricultural and industrial products is highly dependent on energy availability. If the energy source is

expensive, the cost of production of goods and services will be expensive too. Increased production costs raise

prices and cause inflation. Therefore all necessary measures be taken to provide major sources of energy in

industrial and agricultural sectors of theeconomy.

The demand side

Control of Money SupplyThe money supply has a great influence on the rising inflation that is, inflation with increasing the money supply and

vice versa. Therefore, to control inflation, measures must be taken to control the money supply. The moneysupply

can be controlled with the help of monetary policy in which the central bank uses various methods, such as bank rate

policy, open market operations, changes in reserve requirements, credit rationing , direct action etc. All these

methods are useful to control the rate of inflation in a country.

There is no Deficit FinancingDeficit financing shows that public spending beyond their income. The purpose of deficit financing is to meet the

additional costs that the budget deficit. Because the money supply increases in the country and causes inflation.

Therefore the deficit financing should be discouraged and all development costs must be met through taxes and debt.

Population ControlIn most developing countries, the population is increasing very quickly that the production of goods and services does

not increase at the same pace. Because the imbalance between supply and demand of goods and services are

produced and cause inflation. Therefore, to control inflation, appropriate measures should be taken to control thepopulation.

Fiscal PolicyFiscal policy refers to government policy of public spending and taxes. The main fiscal policy objective is to maintain

only the slight change in the general price level. During inflation, the government tries to reduce its expenditure on

unproductive activities and the direct tax rate increases so that the purchasing powerof the population is reduced.

Due to the reduction in the purchase of the population, demand for goods and services will be reduced and controlled

inflation.

Direct Measures
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There are several other options available to the government to control inflation and wage and price freeze, the

rationing of goods, establishment of public service shops, the price review committees, boards of price stabilization,

etc. This direct measures are often used by the government to control inflation

Functions of Central BankOctober 16th, 2010 | Adam | Posted inEconomics | 2,177 views | 2 Comments

Central bank is an importantorganization for any country. It performs traditional and developmental role to accomplishmacro-economic objectives. This includes currency issuance, regulation of liquidity, supervision of banks and

secondary markets, exchange rate management, balance of payment, establishment and development of financial

institutions.

Central bank is the center of banking system of any country and has sole authority to control and regulate the supply

of money. Central bankcontrols the supply of money by keeping the welfare of people in mind as primary object.

Functions of central bank are discussed in detail below.

Monopoly over Issuing CurrencyThe primary function of central banks is to issue money in the country. Central bank issue currency notes by

following certain regulations enforced by the state. There are different requirements which centralbank need to fulfill

for this purpose, one important prerequisite is keeping reserve against issued money. Some important advantages

for this sole authority are:

- Credit creation by commercial banks can be checked and controlled by central bank.

- Central Bank has the confidence of people as it has the government backing and recognition.- As the sole authority of issuing currency there is uniformity in the countrys currency.

- Government can use this sole authority for the best interest of people.

Government Agent and AdvisorIt acts as the government bank and agent, to collect and pay transactions on behalf of the government.

Centralbank has a detail record of all monetary issues and present in good position to advise government for

monetary, banking and financial issues.

Bankers BankIt is the bank for all commercial banks and monitor and control all commercial banks by its regulations. Commercial

banks keep reserves with central bank as a requirement. Central bank also helps commercial banks in their daily

business life by providing loans, security to cash reserves and gives them advice on financial and economic issues.

Clearing House

Another important function central bank does for commercial banks is acting as a clearing house for settle all the billand checks drawn one another.

Lender of the Last ResortCentral bank helps commercial banks when they face any crisis, central bank come to rescue by advancingloans and

bailout packages.

Credit ControlCredit Control becomes an emerging vital function of Central Banks. Although monitoring and controlling credit been

always a function of central banks but as the technology grew and use of plastic and e-transaction is becoming more

common there are many sensitive monetary issues arises. Central Banks take quantitative and qualitative methods

for credit control such as bank rate, open market operation and moral situations etc.

Financial AgentCentral bank works as government agent for foreign exchange and gold transactions.

Collection of Data

Data collection is a silent function of Central Bank, there are professional appointed arrange the statistics for differentreports related to money, credit, foreign exchange etc

Difficulties in the Measurement National IncomeOctober 16th, 2010 | Adam | Posted inEconomics | 1,144 views | One Comment

National Income is a top line figure for the any countrys economy; However, Arranging statistics in areliable data

source need considerable attention and there are some hurdles in measurement of national income.
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DuplicationA major threat to national income computing is replication of value of the product. While measuring the NI of a

country for a specific period the value of products and services should be included at final stage (finish good). The

value of intermediate or those goods which are used for preparation of final goods will not be included; as including

the value of product at different stages can cause the duplication error and in this situation NI will be over-estimated.

Therefore, either the price of final good be included or the value-added method be adopted.

In the measurement of NI, the non productive transactions make the task difficult. Most economists are of the viewthat the productive transactions consist of final purchase of newly produced goods. In oureconomiclife most of the

transactions are of non productive natures which are briefly discussed below.

Securities Transactions of Secondary market:

The sale and purchase of stocks in the secondary market doesnt generate any economic activity, these transactions

are just transfer of ownership. National Income goes over-estimated by including these transactions in national

income computation. The result cannot depict true results; therefore to measure NI such transactions should be

excluded.

Government Transfer PaymentsGovernment is an important player of three sector economy and its payments to public without rendering services

are considered as non productive payments, theses are known astransfer payments e.g., payment of social security,

unemployment allowances, pensions or scholarships to the students. All Such transactions make the

NI calculation complicated.

Private Transfer PaymentsIn addition to government transfer payments, there are private transfer payments e.g., dowry, charity and

pocketmoney. As these payments are rewarded without any productive service so including such type of

nonproductive expenditure in the national income will not give the true picture of NI.

Sale of Used GoodsThe trading of second hand commodities like car, TV, or refrigerator cannot be counted for the current year NI as

these products were included in the NI when sold first time as new finish goods, there will be duplication if counted

again.

Reliable Statistics AvailabilityNational Income measurement is a complicated and delicate process. The availability and processing of data is a

sensitive issue, especially in developing countries availability of exact figures are difficult which makes

thecalculation of accurate NI very complex. In National Income measurement the value of all finish goods from all

factors of production is calculated carefully by keeping all the constraints in mind

Types of GoodsJuly 27th, 2010 | Adam | Posted inEconomics | 1,323 views | No Comment

Goods are the products that are made to fulfill the market needs and can be sold by a seller to a buyer for some

monetary value. There are two types of goods free good and economicgoods. Free goods are those which are not

scarce and therefore such good are of non-monetary value such as air, water and sunlight. Although air, water

and sunlight are natural and are not scarce but these things are sometimes not available at some places like water in

deserted areas are imported from different places therefore people have to pay for it. Similarly if fans are used to get

the air then such air will not be free people have to pay for the fan and the electricity. All those goods that have a

monetary value are economic goods. Normally goods tend to have a diminishing marginal utility; this means that

consumers ultimately decline to consume a product after a certain period of time even if the price of the product is

lowered near to zero. This is because of the consumers satisfaction as if too much of good is consumed it will start

reducing the satisfaction of consumer as there wont be a desire for that good anymore. (Beatty, Pg 1100, 2007)

Goods can be classified as follows:

Consumer GoodsConsumer goods are those goods which are bought for personal use. Goods such as food, clothing etc areconsumer

goods. These goods are mostly for immediate use.

Shopping GoodsShopping goods includes relatively high risk products therefore; the buyers do a thorough research about the product

quality and availability and visit different places where such products are being sold to compare prices before actually
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buying the product. These may be homogenous goods i.e. the same product having same packaging, color, company

etc which cannot be distinguished are sold by different sellers. Or heterogeneous goods which are close substitutes

i.e. they differ in size, shape, quality, company etc.

Capital GoodsCapital goods are those goods that are required by others industries for the production their goods. Capital goods

require a hugeinvestment. Machineries and plants are the examples of capital goods.

Intermediate GoodsIntermediate goods are those goods which are manufactured by industriesto be used in the manufacturing or

production of another good that has a need in the market. Aluminum, rubber, plastic etc are the examples

ofintermediate goods.

Specialty GoodsSpecialty goods are those goods which are not bough very frequently as they require a large amount of investment

therefore; the buyers do an extensive research on all the similar products that are available in the market before

actually making a decision to buy the product.

Normal GoodsNormal goods are those goods which have a direct relationship with the consumers income. The consumers tends

to demand more of the normal goods when they get an increase in their income and their demand decreases with a

decrease in their income.

Inferior Goods

Inferior goods are those goods that have an inverse relationship with the consumers income. The demand for inferiorgoods increases with the decrease in consumers income and the demand decreases with the increase in consumers

income.

Necessity GoodsThese are those goods which are not very expensive and are necessary forlife. Demand for such goods remains

constant throughout.

Luxury GoodsLuxury goods are those goods the demand for which increases at a greater percentage with an increase in

consumers income

EconomicsAugust 7th, 2009 | Adam | Posted in Economics| 1,153 views | No CommentEven though we might not have any idea of what actually economics is, but we do know that the resources in our

world are limited and so, we are forced to use these resources smartly. Now lets head towards our topic of

discussion;Economics, basically, is the study of how a society uses these limited resources to makecommodities that

are useful for the people and that are distributed among them. So, regarding the above claim, there are two valid

propositions i-e 1- resources are limited or scarce; 2- We must use these resources efficiently. Now theres a different

between being efficient and being effective. To be effective is to have the same amount of output as that of the input,

but when we regard being efficient, it is to have a greater amount of output as compared to the input given.

Let us imagine, a society with unlimited resources, a place where everything is available, sounds tempting, must be

Paradise. If that was the case with the world, then managers wouldnt have worries about hiring man-power to bid

them to work. Now, when we say that the resources are scare we are actually comparing these resources with our

desires. We always desire more, but these resources are so limited that we are forced to only choose a few. So we

can conclude that we Humans have unlimited wants and desires, but the resources are limited, so in order to get the

most out of these limited resources we are forced to use them efficiently and make out most for ourselves.

One question always comes into people mind that unlimited amount of natural resources are available such as petrol,

gas, water, coal and etc but still economics definition claims scarcity of resources, if we consider world is full of

natural resources still the economics definition remains true because digging out natural resources also need man

power or human resource which are limited not in number but in skills required to perform the tasks.

Economics has two main branches:

1- Micro Economics

2- Macro Economics.
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Adam Smith is known to be the founder of micro-economics that regards the behavior of organizations, households,

firms etc. Macro-Economics regards the overall performance of the economy of the country, as to the GDP (Gross

Domestic Product), GNP and the lot. We will discuss such terms further on.

Earlier I wrote something regarding inputs and outputs; Inputs are basically the commodities that are used to produce

or make goods or services. Outputs are the result of the production of those inputs. For example: to make an egg we

need a teaspoon full oil, an egg and a frying pan and some salt to give it the finishing touch, now these are the inputs

that are used to produce an output e.g. An omelet or, a half or full fried egg (since we are discussing a basic conceptso I intended to give out an easy-to-understand example, please dont get me wrong)

CPI Consumer Price IndexAugust 30th, 2009 | Adam | Posted in Economics| 1,293 views | No Comment

Consumer Price index(CPI) is the average price of product and services purchase by the

consumers. Where The GDP price index measure the rate inflation of all products and services on

the other hand CPI indicates the change in consumer prices for the defined time period, increase inindex shows the level of inflation at consumer end. There are many different CPI is calculated by

region,types of products, types of consumer etc. The most common CPI is CPI-U, which is CPI for urban area

because maximum percentage of products are purchased in urban areas. CPI is calculated for the given basket of

goods to determine the change in index on monthly or annually.

Formula to Calculate CPICPI = Basket in any given year/ Price of the same Market * 100CPI = $300/$200 * 100 = 150CPI UsesConsumer Inflation

Consumer price index show the change in consume products in a given period of time.

Deflator of other economic series

The CPI and its components are used to adjust other economic series for price change and to translate these series

into inflation-free dollars.Adjusting income payments and Taxes

Over 2 million workers are covered by collective bargaining agreements which tie wages to the CPI. The index affects

the income of almost 80 million people as a result of statutory action: 47.8 million Social Securitybeneficiaries, about

4.1 million military and Federal Civil Service retirees and survivors, and about 22.4 million food stamp recipients.

Changes in the CPI also affect the cost of lunches for the 26.7 million children who eat lunch at school. Some private

firms and individuals use the CPI to keep rents, royalties, alimony payments andchild support payments in line with

changing prices. Since 1985, the CPI has been used to adjust the Federal income tax structure to prevent inflation-

induced increases in taxes.

CPI biasesSubstitution bias

When there in increase in prices of consumer good people consumer less and move towards buying other low price

alternatives is called substitution bias.

Quality Change Bias

Quality of products is improved with the advancements of production methods, life of the product is more then the

past. For example, If person bought an expensive dress and use it for 3 years cost per day is very low as compared

to the dress he bought at lower prices( low quality) and used it for one year. There is no parameter in CPI to indicate

the improvement in quality with the passage of time.

Outlet substitution bias

People used to buy product from normal shops, shopkeepers have to pay less rent for the shop but today people are

shopping at wholesale shops, convenience shops,super markets etc. The shopkeepers have to pay high fixed and
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variable cost for the shops which also impact the prices of products. Consumers can easilypurchase products in less

time without any problem, CPI not includes the following benefits result in outlet substitution bias.

New product bias

Thousands of products are introduced in the consumer market each year but are not included in the CPI is called new

product bias. For example, The price of cell phone decline and quality is improved as compared to 1990s and bring

improvement to people lives but still the prices of cell phones are not included in the consumer price Index

GDP Gross Domestic ProductOctober 16th, 2009 | Adam | Posted inEconomics | 1,790 views | One Comment

The widespread measure of the total output in a countrys economy is called GDP(Gross Domestic Product). GDP is

basically a measure of the market value of all services and final goods produced in a country during a year. It as well

is equal to the sum of the value added to the product at every phase of production by all the industrieswithin a

country, plus the taxesand subtraction of the subsidies on products, in the period of a year. It is also equal to the total

amount of the income generated by production in a country in a year. We will find that there are two ways to measure

GDP Nominal GDP : Measured in actual market prices means the inflation factor is not involved in nominal GDP.

Real GDP : Calculated on constant or unvaried prices.

Real GDP is the most widely used measure of output of an economy; it provides a carefully monitored pulse of any

nations economy. Even though, short term fluctuations may occur at different occasions regarding the business

cycles, but advanced economies generally show a steady hand at long-term growth in the real GDP which also

results in an improvement in the living standards, the process is termed as Economic Growth. There is a term

ineconomicsPotential GDP: which signifies the maximum sustainable level of production that the economy can

produce. Inflation tends to rise when the total output surpasses potential output, and if the opposite happens and the

total output is less than the potential output, then it leads to unemployment.

Potential output is usually determined by the economys productive capacity, which depends upon the inputs

available i-e capital, labor, land, entrepreneurs etc. and also the economys technological efficiency. Due to the fact

that inputs such as labor, capital and the technological level change quite slowly, the affect of these factors on the

potential GDP is steady growth.The formulae for calculating a countrys GDP:

GDP = C + I + G + (X M)

Components of GDPFollowing are the components to measure the Gross domestic product.

Consumption (C)It usually denotes the private consumption, such as the household expenditures (food, rent etc)

Investment (I)

This is the amount that firms and some households invest as capital. Such as spending of households in making new

houses, business firm doing a construction on a certain field for its business operations.

Government Spending (G)It is the sum of government expenses regarding the services and the final goods, which mainly includes purchase of

military arms and weapons, public servant salaries and investment of the government in any field.

Exports (X)

GDP calculates the amount a country produces, that include goods and services produced for any other nations

consumption, due to the surplus amount that has been produced after which therefore exports are added.

Imports (M)

Since imported goods will be included in terms like G, I, or C, it is of vital importance that export must be deducted in

order to avoid counting foreign supply as domestic.

GDP VS GNPGDP is the total value of good and services produce in the country whereas GNP is total value of good and services

produce in the country and also add the value ofcommoditiesproduce by the people of the country in foreign.
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Methods of Measuring GDPGross domestic product is measured using three methods as mentioned below.

The Expenditure Approach The sum of total spending on producing good and services, GDP using this method

can be calculated by sum up consumption, Government spending,Invest and exports deductingimports.

The Income Methods Measuring GDP by Calculating the income of people who are responsible for producing the

good and services.

Product Approach Total value of product and services product in the country

Shortcomings of GDPOctober 18th, 2009 | Adam | Posted inEconomics | 2,689 views | No Comment

GDPis the accurate measure of economy it shows how well or how bad the economy is doing. True said, nothing is

perfect in the world there are some shortcomings of GDP which are important to consider in the country economy.

Non-market TransactionsGDP calculate the transactions occurs in the market place other than that its out of its scope, non-market transaction

are not occur in the market and no proof is available to make it part of GDP. Suppose, a motor mechanic repair his

own car by working whole day, people do the job of gardening by themselves. These type of transaction nevercounted in the GDP, only the transactions occurs in the market are considered in GDP.

LeisureIn recent years, the working hours are reduced to great extent like in USA in few years weekly working hours reduced

from 56 to 36 in addition to this increase in sick leaves, casual leaves, annual leaves, maternity and paternity leaves

bring relief in people life. This leisure surely improve the employees performance but unfortunately the leisure is not

part of GDP although its quite clear that people are working less and producing more output which shows

improvement in productivity and well being of peoples.

Improved Product QualityGDP is the quantitative measure of product and services rather than qualitative measure, it fails to gauge the quality

improvement in the product and services such as computer are available on cheap prices than past but with more

processing and storage. This improvement make people happy and satisfied than before because they are getting

more on very nominal prices. The quality measure have a great impact on economic well being but again GDP

ignores quality attribute entirely.The Underground EconomyThe other aspect of economy which exist in every country with higher percentage in a hidden market. The

underground economy is generated from illegal activities such as gambling, smuggling, robbery, prostitutionand

other. The people involve these type of business have a valid reason to not show their income to the government.

Most people in the underground economy are doing legal activities but choose not to report their income to

Government. The person receiving unemployment compensation benefits may take an off- the-books or cash-only

job. A person give tuition to neighbor kids on behalf of free car repairing services for kids father.

GDP and the EnvironmentThe improvement and increase in production of product and services improve the GDP of the country but without

considering the environmental aspect. The dirty water, chemicals and noise coming out from factories have a

negative impact on the society. The polluted environment cause health issue and reduce the average age limit of

human beings. GDP ignores negative impact on environment and human life. When the money spent to clean the

pollution, those expense are added in the GDP.

Composition and Distribution of OutputThe composition of products are important for well-being. it show whether the products have a positive or negative

impact on society.GDP lacks to address the composition of output it only measures the monetary value of output. If

the price of weapon and encyclopedias are equal it is considered same in the GDP without admitting the importance

of encyclopedias on well-being.

The distribution on income can make a lot of difference in people living standards. The total never tells the distribution

of output among the people, it may be possible 90 percent of total output goes into 10% households. The higher
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value of GDP indicates the economy is doing well and people living standards are improving but if the major part of

the output holds by the less percentage households then it results in higher poverty levels.

Per Capita OutputFor most reason percapita output is the accurate measure of economics performance. The per capita output gain

importance in the measurement of economy because GDP only measure the magnitude of total output, it ignores

change in the standard of living of individual and households. If GDP of country increase 3% in a year and its

population rate grows at 5% percent per year, GDP consider it as improvement in economic performance of thecountry but actually the per capita output is decreased then before which shows downgrade in households and

individual standards of living.

Non-economic Sources of Well-beingThe income of households never indicates the happiness, same for higher GDP never guarantee that individual and

households are happy and satisfied. Some other factors can make the society better off without necessarily raising

GDP. A reduction in crime and violence, peaceful relationship,better understanding of parents and children and a

reduction in drug and alcohol abuse

Fiscal PolicyOctober 25th, 2009 | Adam | Posted inEconomics | 2,372 views | No Comment

Fiscal Policy, a very vital part of economics, is referred to as thegovernment spending as well as revenue collection of

a country.

Fiscal Policy has two main instruments that are;

Government spending

Taxation.

There are certain changes in the composition and level of government spending and taxation that impact the

following variables in the economy of a country:

Aggregate demand and the level ofeconomic activity.

Resource allocation pattern.

Distribution of income.

The overall effect of the budget outcome on an economic activity is termed as Fiscal policy of a country. There arethree particular stances regarding the fiscal policy of a country that are; neutral, expansionary and contractionary:

A neutral stance regards a balanced budget where Government spending = Tax revenue (G = T).

The government spending is funded by tax revenue and the overall effect of the budget outcomeis neutral on

the economic activity.

Expansionary stance of the fiscal policy denotes a net increase in Government spending (G > T) through rises

in government spending or a fall in taxation revenue or a combination of the two. The effect usually leads to a larger

budget deficit or a smaller budget surplus than the Government previously had, or a deficit if the Government

previously had a balanced budget. Expansionary fiscal policy is mostly associated with budget deficit for an economy.

Contractionary fiscal policy (G < T) involves the reduction of the Government spending through higher taxation

revenue or reduced Government spending or the combination of the two in such a way. This leads to a lower budget

deficit or a larger surplus than the Government previously had, or a surplus if the government previously had a

balanced budget. Contractionary fiscal policy is usually associated with a surplus.

Funding MethodsThe government spends money on a wide variety of things, from the military and police to services like healthcare

and education, as well as transfer payments that stand as welfare benefits. This expenditure can be funded in a

number of ways:

Taxation

Benefit from printing money

Borrowing money from the population that results in a fiscal deficit.

Consumption of reserves.

Sale of assets i-e land etc.
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There are two ways for the budgeting to go, one is that the Government will face deficit, and the other, it will face

a surplus, these are the basic form of effects the Government spending have of course.

DeficitA fiscal deficit is often funded by issuing secure bonds such as treasury bills. These pay interest, either for a fixed

period or indefinitely. The nation may default on its debt if the interest and capital repayments are too large. This is

how a Government funds the deficit.

SurplusA fiscal surplus is usually saved for future use, and may be invested in local instruments, till needed. When income

from taxation or other sources falls, usually during an economic crash, reserves allow Government spending to

continue at the same rate, without gaining additional liabilities.

Economic Effects of Fiscal PolicyFiscal policy is used by governments to influence the level of aggregate demand in the economy, in an effort to

achieve economic objectives of stability in the price of goods, employment and the economic growth of the country.

Keynesian (John Maynard Keynes) economics suggests that increasing or decreasing the Government spending and

the tax rates to stimulate aggregate demand as a favorable outcome. This is usually used in times of recession or

low economic activity as an essential tool in providing the framework for strong economic growth and working toward

full employment. The Government usually implements such deficit-spendingpolicies due to its size and reputation and

stimulates trade. In theory, these deficits would be paid for by an expanded economy during the boom that would

follow.

During high economic growth periods, budget surplus is usually used to decrease activity in the economy. Abudget surplus will be implemented in the economy if inflation is high, in order to achieve the objective of price

stability. According to Keynesian theory, the removal of funds from the economy will reduce levels of aggregate

demand in the economy and contract it that will bring stability in the price level.


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Life cycle analysis and assessment

The concept of conducting a detailed examination of the lifecycle of a product or a process is a relatively recent one whichemerged in response to increased environmental awareness onthe part of the general public, industry and governments.

The immediate precursors of life cycle analysis and assessment (LCAs)were the global modelling studies and energy audits of the late 1960s and

early 1970s. These attempted to assess the resource cost andenvironmental implications of different patterns of human behaviour.

LCAs were an obvious extension, and became vital to support thedevelopment of eco-labelling schemes which are operating or planned in anumber of countries around the world. In order for eco-labels to begranted to chosen products, the awarding authority needs to be able toevaluate the manufacturing processes involved, the energy consumption inmanufacture and use, and the amount and type of waste generated.

To accurately assess the burdens placed on the environment by themanufacture of an item, the following of a procedure or the use of acertain process, two main stages are involved. The first stage is the

collection of data, and the second is the interpretation of that data.A number of different terms have been coined to describe the processes.One of the first terms used wasLife Cycle Analysis, but more recently twoterms have come to largely replace that one:Life Cycle Inventory(LCI) andLife Cycle Assessment (LCA). These better reflect the differentstages of the process. Other terms such as Cradle to Grave Analysis,Eco-balancing, and Material Flow Analysis are also used.

Whichever name is used to describe it, LCA is a potentially powerful toolwhich can assist regulators to formulate environmental legislation, helpmanufacturers analyse their processes and improve their products, andperhaps enable consumers to make more informed choices. Like most

tools, it must be correctly used, however. A tendency for LCAs to be usedto 'prove' the superiority of one product over another has brought theconcept into disrepute in some areas.

What is a Life Cycle Analysis?

Taking as an example the case of a manufactured product, an LCAinvolves making detailed measurements during the manufacture of theproduct, from the mining of the raw materials used in its production

what is balance sheet

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